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Does a Loan Settlement Ruin your CIBIL Credit Score?

Does a Loan Settlement Ruin your CIBIL Credit Score?

finance
August 13, 2022
5 min read
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Does a Loan Settlement Ruin your CIBIL Credit Score?
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As your CIBIL credit score is one of the most important factors that define your financial health, you must know what ruins it and what builds it up. It is always advised that if you have a loan or any form of debt, you must repay it on time and in full to avoid ruining your CIBIL credit score. Lets find out if a loan settlement can ruin your CIBIL credit score and what to do if you have already opted for a loan settlement.

Often people make the mistake of assuming “loan settlement” with “loan closure”. Both the labels are different. And both have some influence on your CIBIL credit score. All your payment related activities are shared by the lenders or financial institutions to CIBIL for updation and accordingly your credit score is calculated. Remember, your CIBIL credit score is not fixed and it changes from time to time as per your financial behavior. 

Let us start by understanding more about a loan settlement in detail. 

What is a Loan Settlement?

Borrowers who are in a bind may opt to settle their loans. The reason for loan settlement may be an illness, an accident, a loss of employment, or any other genuine circumstances. In such situations, you let the lender know about your predicament and ask for some time before you start making payments. Or you may want to ask the lender to “settle down” the loan.

The lender can offer you a one-time settlement option in which you and the lender will come to a common agreement on the debt that you have. The settlement amount is always less than the entire amount of unpaid debt you have. The status of this loan will be listed in the credit report as "settled". 

Loan Settlement and Impact on CIBIL Credit Score

For many borrowers, the effect of loan settlement on their CIBIL score ruins their chances of getting loans at competitive interest rates, getting a credit card with a desired limit. The vast majority of borrowers are completely unaware of the potential harm that a loan settlement could do to their credit score. If you decide to settle your debt, you should anticipate future negative effects on your CIBIL credit score. It's not unusual for your credit score to suffer if you have a "settled debt."

The status of a settled debt stays on the CIBIL credit report for as long as 7 years. During these 7 years, whenever you will apply for a new loan, credit card, or any other form of debt, the lender will consider the “loan settlement” status to make their decision. It may reflect that you were unable to repay the debt and that may lead to unfavorable results for your loan application. 

What can be Done to Remove Loan Settlement Status from the CIBIL Credit Report?

First of all, avoid a loan settlement at any cost. If you are in a genuine problem, talk to your lender. They may agree to give you a payment break or holiday. That means you may get sometime from making the repayments. Post that period, you will have to start making the payments. This is completely dependent on the lender, hence, convey your problems to the lender before you consider going for a “loan settlement”. 

If you already have opted for a “loan settlement”, your CIBIL credit score will go for a toss. You may also face issues while getting any new type of credit with a ruined CIBIL credit score. If you wish to remove the status of loan settlement from your CIBIL credit report, talk to your lender and pay off the unpaid debt. Ask your lender to give you a “No Dues Certificate”. Once you pay off the balance debt, the lender will report it to the credit bureaus and your CIBIL credit score will improve. 

Lenders and banks may refuse to provide you with a loan if the CIBI credit score indicates that the debt has not been paid. Keep in mind that debt settlement is not a solution. Banks and lenders offer you a settlement because they know you won't be able to pay back the money, so they agree to accept whatever you can afford to somehow manage the loss at hand. It is always wise to keep your borrowing within your means and make sure you have a backup plan for paying back the loan. The settled status of your loan will remain on your CIBIL credit report for the following seven years, so keep that in mind as well. 

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FAQs Related to Loan Settlement and Impact on CIBIL Credit Score

Can I remove settlement from CIBIL credit report?

Yes. If you had settled any loan in the past, contact your lender. Pay the unpaid debt on your loan and ask the lender to give you a “No Objection Certificate”. The lender will update this to CIBIL. Additionally, you can also raise a dispute on the CIBIL website with all the necessary documents showing that the debt has been paid off completely now. The dispute resolution will take 30-45 days, post which, the status of settlement will be revised. 

Does CIBIL credit score increase after closing a loan?

If you have been paying all the EMIs of your loan on time, when you close the loan, your CIBIL credit score will see an increase. When you close the loan on time, it sends a message that you are a responsible borrower who managed to pay all the debts on time and in full without any fail. Hence, to protect your CIBIL credit score from ruining, you should make all the repayment on time. 

How to increase CIBIL credit score after loan settlement?

The first thing you can do to increase your CIBIL credit score after a loan settlement is to try to repay the unpaid debt that you have. If you can repay the unpaid balance of the debt, contact the lender and pay it off. Further, you can keep repaying your other debts on time to improve your credit score. CIBIL records all of your financial activities as and when reported by lenders and banks. Keep your credit utilisation percentage below 35% to see an improvement in your score. 

How long a loan settlement stays in CIBIL credit report?

For 7 years. CIBIL will keep the status in the credit report for 7 years during which, you may find yourself in problems as lenders and banks may deny extending credit to you due to the status of settlement. Or it may happen that you will get loans at comparatively higher interest rates due to the risk associated with you of not paying back the loan. 

Does one time settlement affects CIBIL credit score?

Yes. One time loan settlement will impact your CIBIL credit score. You need to be careful while accepting a loan settlement offer from your lender or bank. It should always be the last resort. Look for alternatives to repay the loan rather than opting for a one time settlement.